The current 2020/21 tax year will end on 5 April 2021. As a new tax year starts, many allowances reset. For some, it will be your last opportunity to use them. Using these six allowances before the deadline can help you get the most out of your money.
1. ISA allowance
ISAs are a popular way to save and invest. They are tax-efficient, you don’t need to pay Income Tax or Capital Gains Tax on the interest or returns earned. Maximising your ISA contributions to make use of the annual allowance can reduce your tax bill. The current ISA allowance is £20,000 per tax year.
Remember, you can also use a Junior ISA (JISA) to save or invest for a child. Similar to an adult ISA, they are tax-efficient. You can contribute ÂŁ9,000 per tax year. Money contributed to a JISA is locked away until the child turns 18. Additional steps are necessary if the child already holds a Child Trust Fund.
2. Pension annual allowance
The annual allowance is the amount you can pay into a pension each tax year without suffering a tax charge on the excess funding. Tax relief provides an instant boost to your pension savings and is given at up to the highest rate of Income Tax you pay. As a result, it makes paying into a pension an effective way to save for retirement.
If you’re in a position to do so, increasing pension contributions to take advantage of this can significantly increase your pension and income when you retire. Usually, you can personally invest up to 100% of your annual earnings or £3,600pa and receive tax relief on those contributions. In addition there is a limit called the annual allowance, £40,000 for most people, covering contributions from all sources including employer. If this is exceeded, a tax charge applies to the excess. If you’ve already accessed your pension flexibly or are a high-earner, your allowance may be lower. If you are able to use unused annual allowances from the last three tax years, your figure could be higher. Please contact us if you’re not sure what your annual allowance is.
3. Gifting allowance
If your estate may be liable for Inheritance Tax, gifting money or other assets during your lifetime can reduce the bill, as well as allowing you to see the benefits gifts bring to loved ones. However, some assets are still considered part of your estate for Inheritance Tax purposes for up to seven years after they are gifted.
Making use of gifts that are immediately outside of your estate provides one solution. One of these is the annual gifting allowance, which means you can pass up to ÂŁ3,000 on to a loved one tax-free. This is per individual, so as a couple you can gift ÂŁ6,000 without worrying about Inheritance Tax each year.
4. Capital Gains Tax allowance
When you sell or dispose of certain assets, you may be liable for Capital Gains Tax (CGT) on the profit made. The current CGT allowance of £12,300 means that most people will not have to pay this tax. However, if you’re likely to exceed the limit, spreading out the sale of assets across several tax years can make sense.
5. Dividend allowance
If you’re invested in dividend-paying companies or funds, the dividend allowance can be a useful way to boost your income without increasing tax liability. For 2020/21, the dividend allowance is £2,000. If you’re a company director and are a shareholder, you may be able to pay yourself in dividends to make use of this allowance. Many collective investments (unit trust, OEICs) are also dividend-paying.
6. Marriage Allowance
Finally, if you’re married or in a civil partnership, make use of the Marriage Allowance if one of you doesn’t fully use their Personal Allowance.
The Personal Allowance is the amount you can earn in total each tax year before paying Income Tax. Your total income may include your salary, pension benefits, investment returns and more. For the 2020/21 tax year, this is £12,500. If your or your partner’s income doesn’t exceed the Personal Allowance, and the other person doesn’t pay more than basic rate tax, you can usually pass on a portion to the other (fixed at 10%). This can mean reducing your tax bill by up to £250 as a couple. Backdating for up to four tax years is also possible if eligible.
Get in touch to discuss your allowances and financial plan
The above list isn’t exhaustive, other allowances may be valuable to you. If you’d like to discuss your financial plan and the allowances, tax reliefs and incentives that could help you get the most out of your money, please get in touch.
While allowances are often discussed as the end of the tax year approaches, putting a medium-term plan in place that considers these can be beneficial. For instance, if you’re investing through an ISA, spreading contributions across the 2021/22 tax year to fully use your allowance over 12 months can make sense. Likewise, spreading pension contributions across a year is preferable to a lump sum for many people. If you want to create a plan for 2021/2022, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
The Financial Conduct Authority does not regulate estate and tax planning.
